The UK market succumbed to some of the global pressures in March, with tariff-driven concerns impacting markets globally. The performance gap between large cap and mid/small gap – which was c. 10% at the end of February – did not close in March.
This gap remains large vs history, and is all the more anomalous given the comments above on UK vs USA economic trajectories. The FTSE All-Share Index ended down 2.3%. The Fund was down 3.25%. All of the Fund underperformance came in the last day of the month, which was a large ‘risk off’ day associated with tariffs.
Looking at the peer group, the Fund is the 9th best performing Fund in the Equity Income sector over the last 12 months. On a longer-term basis, the Fund is ranked in the 3rd decile over three years, the 1st decile over five years and the 2nd decile over 10 years. The Fund remains the best in the sector since its inception in 2004.
There were two stock-specific developments that impacted performance which broadly offset each other.
First, Kenmare received a bid approach at a c. 90% premium from a private equity firm working with its former CEO. The shares ended the month up c. 45-50%, as we wait to see what a final outcome will be. As regular readers will remember, in Q1 2024 we publicly called for the board to consider selling the company due to the material and persistent undervaluation of the stock. If consummated, the outcome will be pleasing.
Second, Savannah Energy – which had been suspended as it looked to make a large acquisition – returned to the market when the acquisition opportunity fell away. The length of suspension, coupled with (in our view) poor communication flow during this period, had created frustration in the shareholder base. We will be making our views regarding this and the board governance – which are linked – known in the weeks ahead.
The results season has now finished. By and large, it was very solid – which we describe below.
Examples of good results came from Forterra (slightly better profit, better than forecast dividend, confident outlook), Keller (better than expected profit, upgrades and the start of its first share buyback), Costain (higher than forecast dividend), Eurocell (unexpected new share buyback / good acquisition), FDM (strong start to the year, higher than expected dividend), TP ICAP (confirmation that the demerger of its data business, Parameta, is on track, new share buyback) and Phoenix, where the new finance director has injected credibility to increased targets. Wickes also had strong results, and started a new share buyback. All of these stocks performed well on the back of these results.
Both our engineers (Morgan Advanced Materials and Vesuvius) downgraded numbers, citing weakness in demand in Europe and China and concern about the impact of Trump’s tariffs. WPP’s update was also sluggish, part of which was macro-driven. The two stocks that fit into the stock-specific category are Severfield and Headlam, the former having a second profit warning. As we indicated in a previous monthly report, we have engaged with the chairman to work with him to recover value which is material in this UK market leader, which also owns a similar valuable Indian business. We supported his decision to change the CEO during the month. Headlam had weak results, with the recovery plan laid out last year in progress.
Elsewhere, Energean was weak after announcing that the sale of some of its Mediterranean oil assets would not proceed. Directors collectively acquired c. £3m of stock. Kier weakened post good in line results. IAG was also weak following a strong year to date run and Hammerson continued to be sluggish.
On the positive side, ITV was up strongly as rumours continued to circulate regarding corporate activity around both parts of its business. Sthree, which has material German exposure, rose following the fiscal changes discussed above.
Portfolio Activity
A number of our large active bets performed well, which meant we had to mark position sizes back to our maximum active position size (c.300bp). This included ITV, Aviva and Phoenix.
We also reduced our International Personal Finance holding by c. 10% to keep that stock, which was our strongest performer around its target weight of c. 100bp. Other reductions included (a) First Group which was strong, as the share buyback finished – here the business remains very strongly positioned post the nationalisation of part of its rail business, and (b) NatWest Group which, as we noted last month, had got to within 20% of our target price. The reduction in NatWest Group has also funded the material increase in our Lloyds weighting since the start of the year. Lloyds had lagged NatWest due to the legal issues in motor retail; half of that gap has now closed.
Elsewhere we continued to add to last month’s new addition, Schroders, which had a strong capital markets event announcing higher than expected cost reductions and greater focus and clarity on the good parts of the business, e.g. wealth management.
In the commodities sectors, we added to Savannah Energy, which came back from suspension as noted above, and Glencore which was weak despite the rise in commodity prices also noted above.
Other additions included Morgan Advanced Materials and, at the start of the month, FDM. The former had sluggish results (as expected, albeit the share price reaction was more marked than we would have predicted), whilst the latter had a strong statement (vs depressed expectations), which saw the share price lift.
Finally, in the financials sector we continued to add to Hammerson which yields 7% and is growing its dividend, with ongoing rental growth in critical assets like the Bullring in Birmingham likely to drive NAV growth.
Dividends – upgraded guidance
The Q1 2025 dividend that went ex-dividend at the end of March, declined by c. 5% year on year. This is entirely a timing difference related to when stocks go ex dividend. We expect both the Q2 and Q3 Fund dividends to grow > 10%. Based on the mid-point of the guided growth of 6-8%, the Fund would yield 5% for 2025. The first early look into 2026 is positive, with the implied Fund dividend growth rate looking healthy at this early stage.
Outlook
Investor confidence in US equities has taken a severe backward step too and, in many respects, this is an encouraging development. An end to US ‘exceptionalism’ will, in the medium term, be considered to be a healthy development for global equities, and other markets across the world are likely to be relative beneficiaries. The dramatic policy response from Germany this month has, in many respects, been forced upon them by Trump’s actions and threats, but the removal of the fiscal brake there has been long overdue and is a welcome change of direction. In the short term, markets are likely to prove volatile as the investment community adjusts to this change of leadership, but multiples across Europe, the UK and emerging markets are undemanding. Whilst the UK media, and market commentators more generally, continue to view with scepticism the latest policy moves by the Labour government – and Rachel Reeves in particular – it is encouraging that activity and confidence are picking up gently after the self-inflicted wounds of the Autumn Budget. If confidence can continue to build, helped by a series of likely cuts to interest rates during 2025, consumers in particular have the financial firepower to meaningfully increase activity. With elevated savings ratios and £500bn more deposits than loans across the UK private sector, the scope for a pick up is clear, and it has been interesting to observe consumer-facing businesses such as Next, DFS and Wickes beginning to see this.
The resilient start to the year by many of our companies has allowed us to upgrade our 2025 dividend guidance, which results in the Fund prospectively yielding well above 5% as we look into 2026, enhanced by the c. 5% of equity being retired by share buybacks. This total distribution yield of over 10% continues to look highly attractive.
